Financing start-ups€¦ · they invest and influencing their development strategies. Their investment is known as “risk capital”. While they cannot avoid risk, they assess the

Financing start-ups: Processes, criteria and lessons learned from

case studies

Bachelor Project submitted for the Bachelor of Science HES in Business Administration with a major in International Management

Clara MILLAN CASTELLS

Bachelor Project Advisor: Frédéric RUIZ, Professor

Geneva, 31st May 2013 Haute école de gestion de Genève (HEG-GE)

International Business Administration

Financing start-ups Clara MILLAN CASTELLS 1

Declaration

This Bachelor Project is submitted as part of the final examination requirements of the Geneva

School of Business Administration, for obtaining the Bachelor of Science HES-SO in Business

Administration, with major in International Management. The student accepts the terms of the

confidentiality agreement if one has been signed. The use of any conclusions or

recommendations made in the Bachelor Project, with no prejudice to their value, engages

neither the responsibility of the author, nor the adviser to the Bachelor Project, nor the jury

members nor the HEG.

“I attest that I have personally completed this work without using any sources other than those

quoted in the bibliography.”

Geneva, 31st May 2013

Clara MILLAN CASTELLS


Acknowledgements

First of all, I would like to express my gratitude to my bachelor project advisor, Professor

Frédéric Ruiz, for his support and his valuable network and experience. Thanks to him, I had

the pleasure to interview Mr. Bernard Vogel, co-founder of Endeavour Vision, and Mr. David

Rimer, co-founder of Index Ventures. Those interviews were among the most interesting of my

career; therefore, I would like to give them a special acknowledgement for introducing me to

their unique and special industry, the one of the Venture Capital world.

I would also like to thank my father, Professor José del R. Millan, for his trust. He gave me the

opportunity of meeting passionate entrepreneurs through his network. This allowed me to

interview Dr. Andre Mercanzini, co-founder of Aleva Neurotherapeutics, and Dr. Tej Tadi,

founder of Mindmaze. My sincere gratitude to both of them for the time and the interest they

dedicated to my research.

I would like to address a special thanks to my former professors, Professor Alexandre

Caboussat and M. Laurent Matile, for their support and confidence in me during my bachelor.

Eventually, I want to testify all my gratitude to my mother, Dr. Nuria Castells Cabré, who was

my main support and advisor. My success would not have been possible without her priceless

contribution.


Executive summary

Behind every business, there is an idea; for realizing it, investment is needed. This thesis

focuses on a particular type of investment, the one related to start-ups and venture capitals.

The most brilliant idea will need to have some capital investment to be launched. The

difference compared to ongoing businesses is that a new business implies a higher risk, which

cannot be measured with the usual criteria used for an existing business. Therefore,

investment in start-ups can be analyzed as a special type of investments, which I will describe

in this thesis, based on literature review, desk research and real cases studies. I will draw

some conclusions and propose some criteria for generic guidelines to help investors as well

as entrepreneurs looking for funding.

This paper aims to identify the key success factors for successful business stories. Even

though it focuses on innovative and futuristic businesses, it can also provide some good advice

and tips for entrepreneurs in any type of industry.

The analysis will focus on the Venture Capital industry since it is the main source of funding

for start-ups, being the most significant and active shareholders of the companies in which

they invest and influencing their development strategies. Their investment is known as “risk

capital”. While they cannot avoid risk, they assess the level of risk to decide their investment.

World-wide recognized companies such as Skype or Microsoft were successful thanks to this

type of investment

Investments in start-ups are organized in different steps and the period of investment is usually

longer than for a traditional investment. They face much higher potential risk, due to the

uncertainty associated to the success of the investment, but it also implies a much higher

potential yield for the investment. A four-step model is used as a reference for start-ups

investments. This thesis analyzes in detail the four phases of the investment process and

includes a clear identification of the factors to be considered at each stage.

The different types of investors involved in the investment process are described in the first

section, illustrated by real life case-studies, with risk venture companies based in Switzerland:

Endeavour and Index Ventures. In the following section, real case-studies of start-ups are

described, based on personal interviews with the founders of Mindmaze and Aleva

Neurotherapeutics. The last section is a guideline for entrepreneurs highlighting the key

elements learned during the research.


Table of Contents

Declaration .............................................................................................................................1

Acknowledgements ................................................................................................................2

Executive summary ................................................................................................................3

Table of Contents ...................................................................................................................4

List of Tables ..........................................................................................................................5

Introduction ............................................................................................................................6

1. Investment in start-ups ..................................................................................................11

1.1 The investment .......................................................................................................11

1.1.1 Risk Capital .....................................................................................................12

1.1.2 Investment stages ...........................................................................................13

1.2 The investors ..........................................................................................................16

1.2.1 Love Money ....................................................................................................17

1.2.2 Angel Investors ...............................................................................................19

1.2.3 Venture Capital ...............................................................................................20

1.2.4 Crowd funding .................................................................................................23

1.3 Win-win situation ....................................................................................................24

1.3.1 Benefit for the investors ...................................................................................24

1.3.2 Benefit for the start up .....................................................................................26

1.4 Key statistics ..........................................................................................................28

2. Case studies .................................................................................................................30

2.1 Venture Capital companies ....................................................................................30

2.1.1 Endeavour Vision ............................................................................................30

2.1.2 Index Ventures ................................................................................................31

2.2 Start-ups ................................................................................................................33

2.2.1 Mindmaze .......................................................................................................33

2.2.2 Aleva Neurotherapeutics .................................................................................39

3. Guidelines for start-ups .................................................................................................43

3.1 Advices ..................................................................................................................43

3.2 Profile of an ideal entrepreneur ..............................................................................45

3.3 Key success factors ...............................................................................................46

3.4 How to choose a good partner? ..............................................................................48

Conclusion: lessons learned .................................................................................................49

Bibliography .........................................................................................................................51


Appendix 1: Amounts raised by regions................................................................................52

Appendix 2: Historical trend ..................................................................................................53

Appendix 3: Fundraising statistics ........................................................................................54

Appendix 4: Stock market entrance in 2012/2013 .................................................................55

Appendix 5: Useful addresses ..............................................................................................57

List of Tables

Table 1: Early stage Investing Yield: The Highest Long-Term Returns ................................. 25


Introduction

Nowadays, the world is facing a global challenge concerning the unemployment rate that is

growing in many industrialized countries. Over the years, more and more people are being

caught in systems that do not create enough employment for everybody. The issue of finding

work is sometimes solved by becoming an entrepreneur.

Unemployment affects now a labor force which is often overqualified compared to the working

opportunities that the current labor market can offer to them. In the recent past, people could

move and find work abroad, but in the current situation companies are cutting budgets and

unemployment rates are increasing in many countries. People seeking employment have to

emigrate in complete different economic environments, far away from their homes, to increase

their job opportunities and career development. As an alternative, some of the high-level skilled

unemployed people think of creating their own companies, and need funding for that purpose.

The real problem is how to create new employment opportunities if there is no willingness to

finance new companies? The banking sector, especially the financing sector, is damaged by

the recent financial crisis. If banks do not finance new companies, no new works are created,

unemployment increases, the economy slows down and the economic cycle enters into a

vicious circle.

The main issue for start-ups is the 3-years based analysis to assess their solvency made by

many banks when an entrepreneur asks for a commercial credit. The bank will request a proof

of the business’ profitability by checking 3 years of its past accounts, as part of the decision-

making process to grant the requested credit.

To face this issue, investors’ groups have been growing around the world, such as Love money

or Angel investors. However, the most famous and the most requested are companies called

"Venture Capital". They provide the most risky capital of a company, this is why this capital is

called Risk or Venture capital. This capital is the ground of many new businesses.

Start-ups are the most suitable to search for new channels to find investors, and nowadays

venture capital investments are becoming famous and appealing. Venture capital investors

represent a key partner for many start-ups around the world. They do their own financing

process by investing in start-ups looking for external funding.

The investment can be done at any business stage. Some companies are already established,

some others are still just “seeds”. This type of investment is not new, but the situation post-

crisis is increasing the need for entrepreneurs to search for new ways of financing if they want

to have a solid ground for their business.


Venture Capital companies (VCs) provide risk capital if they consider the business idea as

being valuable. They believe that by assuming this risk they will contribute to the development

of a successful company, achieving a “win-win” situation and positive returns on investment.

Start-ups will then have sufficient funding to develop their business and the VCs will benefit

from their profits.

This type of investment is also done by private investors using private networks (families,

friends, fools) or investment funds for start-ups (crowd funding). Those different ways of

financing are not new but their business is increasing year by year. Nowadays, we can find

websites, investment funds or even companies doing fund-raising for start-ups as their main

business. Some of them are behind worldwide successes.

The globalization effect is turning our world into a little village and people are used to consume

the same kind of products. This effect is similar in the investment world. Multinational

companies are everywhere and traditional investors prefer to invest in already established and

recognized companies. However, this kind of investment is not always the best one, in terms

of profitability and sustainability. Some people prefer to invest in new ideas, or little companies

that need investments to develop their projects. This can be a profitable investment, while

representing an open door for new jobs and fostering the development of new technologies

and new products.

Every company in the world started one day with an idea. Almost every idea needs money to

be achieved. In the past, every big company of today was a small start-up working and

believing strongly in its own idea. Today, many of those companies are big players in their own

industries and their reputation is already established. However, for most of them, their success

is not only due to a brilliant idea.

Behind the idea, there is always the company’s funding. This funding can also be called the

company’s capital, and this capital is often provided by external sources. This capital is a key

source for the development of a company, as it provides for instance the opportunity of

investing in human resources or new equipment. This capital is not always available and in

many cases entrepreneurs need to look for external sources of capital.

The Venture Capital industry is a part of the Private Equity industry (PE). Some Private Equity

Funds (PEF) specialized in Venture investments had very high return on investments during

the late 1990s. These success stories helped to increase the profile of the industry. Despite

the amount of institutional investments, the PE investments decreased during the crisis due to

difficulties to raise funds.


PE investments follow specific investment strategies and the type of financial products used

depends on the investment stage of the company. They can invest either in start-ups or in

mature companies. Usually, the companies dealing with the PE industry are looking for capital

while, for different reasons, traditional sources of financing such as banks or public institutions

are not available.

Two types of PEF are available in the market: the Buyout funds and the Venture Capital funds

(VCFs). They are close in terms of management and investment period. However, the Buyout

funds focus on already established and mature companies. VCFs focus on young companies.

Their main difference is the type of funding: Buyouts use debt and equity as financing, Ventures

never use debts.

As this paper focuses on how to finance start-ups, I will concentrate the analysis on the Venture

Capital industry. They are usually significant and active shareholders of the companies where

they invest. Their goal is to influence the companies’ strategies in order to help the evolution

of their portfolio thanks to their high degree of control. Compared to the other modalities of

traditional investment, PE’s customers have a better access to the information of the

companies of the funds where they invest. This type of investment is much more transparent

than the large majority available on the market.

By investing in the VC industry, you invest in start-ups that will create jobs, pay wages and

contribute to the economic development. The National Venture Capital Association (NVCA,

leading trade association of Venture Capital in the US) states clearly its aim to promote job

creation and economic growth by helping and supporting entrepreneurs to turn ideas into real

products for the future.1 VCs support entrepreneurs willing to create jobs and change the way

we live and work. NVCA reported in 2009 some statistics: 11% of private sector jobs in the

USA originated from companies supported by VC companies and their revenues represented

21% of the GDP. They are becoming a lung for the private sector economy and their market

opportunities are increasing year by year.

The VCs’ investment process involves three main players: the VCs, their portfolio’s start-ups

and the investors. The start-ups apply for funding, the investors bring their money and the VCs

manage both sides. They are in the middle of the process, they invest the money, but they also

provide support and advice to their start-ups. This is a main characteristic of this type of

investment, the money is not all. There is a unique possibility of helping the investment to grow

in terms of real added value by coaching, training, networking, and many other types of

material or moral investments. VCs own equities of their portfolios’ companies. They have a

1 First paragraph of the official website: www.nvca.org


personal interest linked with the success of their portfolio’s start-ups. As they invest their own

money and time in the companies they advise to their customers, it implies a trust-based

relationship between the three actors.

VCs assume the financial risk, they finance and guide entrepreneurs without having any

concrete guarantee about the future of their investment. However, they use some techniques

to evaluate the potential risks. This will be addressed later in this study.

The VC customers are long term investors. They invest in “Venture Capital Funds” (VCFs),

which are funds invested in start-ups, usually for at least 10 years. This is a serious investment,

the decision needs to be thoroughly analyzed and the conditions need to be agreed and

understood by the investors from the beginning.

While investing through the services provided by a VC, investors are actually investing in many

different start-ups that are part of the VC’s portfolio. Their advisors (the VCs) are investing in

the companies they offer to them as an investment (the start-ups). This means they truly

believe in the success of their portfolio’s companies and the risk is taken by all three parties,

not only by the customer (the investor) as it was usually the case during the crisis. If the

portfolio’s companies do not earn money, the VC company and its customers neither.

Nowadays, many investors need this commitment in order to trust their investment’s advisor.

The profitability and sustainability of VC investments are also related with the investment done

at the adolescent stage of a company’s life-cycle2. At this stage, the growth potential is really

high. Due to the diversification, the structure and the profits of VCFs, big customers and

institutions are now investing in VCs. Among these customers we can even find pension funds

and universities around the world.

An excellent example of a VC’s success at the global level is Skype, financed before the crisis

by a VC called Index Ventures. The VC met with Skype founding members in 2005, when the

company was trying to find investors. At the time, Skype was in trouble and the 3 associate

creators were close to abandon their idea, due to the lack of funding to launch their project.

Thanks to the Index Venture’s investment, the company became Skype as we know it today.

However, not every company financed is a success, and for each Skype there are dozens of

failures.

Obviously, many entrepreneurs already established in their business know they have a good

growth potential. However, some of them need help because they require new investments to

boost their company. Some other entrepreneurs are not yet established, but they have an idea

2 How Venture Capital works, by Bob Zider, Harvard Business Review, 1998


or a prototype and need seed-money to create the business. Every business is different and

they are not all at the same stage. Thus, the need of financing is different for each company

at each step of the business cycle.

There are 4 main stages for a business: seed, early, middle or late stage. I will explain the 4

steps in detail, as this is the basics when entrepreneurs look for financing. This is a crucial step

for a VC analysis, their support in terms of coaching, training and funding is different at each

step. Furthermore, many VC companies do not deal with the 4 steps.

The aim of this research is to provide a guideline for any innovative entrepreneur looking for

an external funding and willing to succeed. This is a translation of a complex process that will

help entrepreneurs to evaluate the stage of their business, the type of financing needed, the

strengths and weaknesses of their business plan, and the tips for successful collaboration in

the long run.

Ultimately, this paper aims at helping entrepreneurs willing to succeed with innovative ideas,

in order to change our daily life and to make this world better. The aim is not to explain how to

establish a small restaurant in the district or a clothing store down the road. The aim is to help

young dreamers to achieve and realize their dreams by having a clear vision and description

of the fund-raising opportunities available on the market for futuristic ideas.


1. Investment in start-ups

Investments in start-ups are special investments, they are organized in different ways and the

period of investment is usually longer than for a traditional investment.

If you had to remember only one sentence about the investment in start-ups, it would be this

one: the most important is not only where, but also when you invest. Start-ups are in constant

evolution, consequently depending on when you invest the situation can be totally different. It

is important to be an expert or to have an expert in order to identify the best moment to invest.

Similarly, the reminder is the same for entrepreneurs looking for investment: you have to be

clearly aware about your company’s needs and stage in the lifecycle before asking for funding.

Many entrepreneurs failed in their fundraising process because their plan was not elaborated

as the investment industry was expecting, not because the idea was bad.

In order to understand the procedure and the key success factors, I will detail the investment

itself, the different types of investors, the applicants for investment and eventually the win-win

situation created by the process.

Many people want to invest in start-ups and many entrepreneurs are willing to raise funds.

Nevertheless, the process, the opportunities and the amount of information available are so

complex and diverse that one can easily get lost. The aim of this section is to clarify, organize

and describe all the important characteristics for a successful fund raising.

The analysis is done for both sides, investors and investees. I believe it is important for both

parties to understand the expectations and the needs of each other in order to have a full

awareness of the situation. This may improve the collaboration and increase the potential

growth of the partnership.

1.1 The investment

An investment in a company needs a complex analysis. For big companies listed in the stock

markets around the world, the analysis is done frequently and everybody has an access to the

annual reports and other types of financial information. For start-ups, the process is much more

complex, with no background based on annual reports, no public information and no forecast

based on financial evidence.

The critical step for a company’s funding is the risk capital funding. This step is crucial for the

future of a business as it is the ground step. When financing a risk capital, a VC is financing

the foundation of what could become a solid player in its own market sector. The main risk

factor is the uncertainty, the investor has no guarantee of the business’ success. On the other


hand, if nobody is willing to finance this risk capital, the business will never grow and the

opportunity may be missed.

When a start-up looks for external funding, many factors have to be taken into account. The

first one, is the stage in the life-cycle of the company. As mentioned in the introduction, every

business evolves and at each step the needs are different. Some businesses evolve faster

than others, some become bigger than others, and at each level and size they can be profitable

and competitive, the only difference is the benchmark framework we use to evaluate them.

Before looking for investors, an entrepreneur needs to carefully assess at what stage the

company is. To do so, a four steps investment cycle has been defined, and the investment

approach will vary according to these different phases.

1.1.1 Risk Capital

Risk Capital, also called Venture Capital, is a capital available for investment in new or

speculative companies. For the purpose of this paper, I will only focus on the Risk Capital

dedicated to finance new businesses.

This capital, in spite of the high risk involved, represents the foundation of a company’s capital.

Every company has a Risk Capital but not every business is able to go beyond. As its name

suggests, this investment has a high risk of loss, especially when Risk Capital is invested in

companies focusing on niche markets. However, this is all the interest for capital providers: a

high risk implies also a high potential yield for the investment.

As a general rule, usual credit institutions, banks and other typical capital providers do not

provide this type of capital. The risk linked with the investment is too high and the amount of

tangible guarantee of the future success is too small.

There are different types of Risk Capital providers, the biggest ones are Venture Capitalists.

When they provide Risk Capital to a company, the capital is provided in stocks. Therefore, the

companies where VCs invest need to have a stock capital. For the other investors, the rules

are less defined but the investment process is similar.

Companies have different stages in their life-cycle and capital requirements tend to change

with the evolution of a business. In order to make it clear and easier for investors and

entrepreneurs, a four step investment stage process has been established. Worldwide

investors and companies focusing on the Venture Capital industry follow this four step model.


1.1.2 Investment stages

The investment stages are defined in a four steps investment cycle: seed, early, middle and

late stage. Every company starts at the seed stage, but not every company is successful. Only

a successful company will evolve through the four steps and the investors’ profile will change

and evolve with the business.

The different investors needed at the different stages of a company lifecycle can be divided in

the following categories: Love money, Angel investors and Venture Capital companies. They

will be detailed in the next section of this chapter (1.2).

The definition and the understanding of the different stages of a company’s lifecycle is crucial

for a successful fund raising or an eventual partnership. An entrepreneur needs to be aware

of the needs of its company and the expectations of the investors, partners and other types of

stakeholders during the evolution of the business.

1.1.2.1 Seed stage

The seed capital is usually provided in order to develop a prototype or an initial concept.

Entrepreneurs looking for seed capital have an idea but not enough money for its development.

They can have a product but difficulties for its commercialization, small or inexistent sales, or

even just an idea but no finished product yet.

Given the risk linked to an investment at a stage where there are no guarantees of success,

the usual seed investors are called “Love money” and “Angel Investors”. Love money investors

are family, friends and fools. Angel investors are early investors not considered as part of the

love money group, with usually a higher amount of resources. They expect a return on

investment around 80-100%.

Venture Capital companies are not typical investors at this stage of a company lifecycle. VCs’

requirements are often too high and start-ups results usually too small to attract their

investment. However, some companies with exceptional potential can be considered at this

stage, but this is rather the exception more than the rule. In the VC industry, the seed

investment represents a small part of the business. Typical “seed funds” go rarely up to one

million of Swiss francs. However, for unique and futuristic projects, some companies, such as

Index Ventures, offer some funds called “seed +” going up to two millions of Swiss francs.

The specificity of this type of investment is the frequent need of networking and coaching.

Some entrepreneurs have amazing ideas with exceptional growth potential but they lack the

necessary networks in the field they want to enter. It is naive to think that talent is everything,

without a good network it is really hard to be successful. Moreover, to have a good network in


the field can also help to receive good advice and expertise in order to improve the idea before

the finalization of the project.

The key success factor at this stage is to look for experts in the field and to acquire their

expertise before entering the market. It is important to keep in mind that everybody needs to

study and train before becoming an expert in every kind of industry.

1.1.2.2 Early stage

This stage represents generally the first time that a company offers investment opportunities

for external sources. In other words, companies usually raise external funds for the first time

at the early stage. An entrepreneur will usually start by setting up a business with its own

capital, which is the typical seed stage of a company. When the business starts running, with

a good growth potential, there is a possibility of raising funds externally. For an average

company it is almost impossible to raise external funds before this stage, as there is not enough

evidence of success to convince external investors such as VCs.

The early stage is officially the first stage where VCs invest. In comparison with the middle and

late stage, this investment involves the highest risk, due to the lack of information necessary

to forecast a potential success. Moreover, the amount of investment is limited and provided

cautiously as the success of the business is not yet proven.

This step is also called “A-round” (or “Series A”), as it is the first significant round of corporate

investments. It is considered as a pre-revenue investment because most of early stage

companies are not yet profitable. When a VC invest in this type of companies, an evolution

plan is elaborated, including different steps and objectives for the evolution of the start-up.

When those objectives are successfully achieved, step by step, the VC is willing to provide

more capital. When a company asks for new capital, it represents a new round of financing.

Consequently, the start-up will be revalued and the VC will start new rounds (B, C, etc.) when

needed. The amount provided to early stage companies varies between one and 5 millions of

Swiss francs.

Beyond the financial investment provided by VCs, there is also a non-financial investment done

at this stage. If investors have good knowledge about the field where they invest, they can

directly advice the entrepreneurs. Moreover, a network in the field of interest is usually provided

by VCs to their portfolio’s start-ups. This is a typical characteristic of the VC industry. The aim

is to create a strong portfolio thanks to a strong collaboration between the different partners.

Actually, when a VC invests in a start-up, it is often considered as a limited partnership and

the VC is willing to create a relation between its partners in order to make them evolve faster


and better. The aim is to progress through the four steps, and ultimately to become a leader in

the market.

1.1.2.3 Middle stage

A middle stage company, also called growth stage or mid-stage, is a company already

established in the market. As a general rule, a company at this stage has already customer

relations established, good revenues and a business model running at a competitive level.

However, this type of companies can still develop better processes and have possibilities to

expand their business beyond their actual situation.

Theoretically, it is easy to categorize a company in one of the four steps, but in practice, the

distinction is much more complicated. We could differentiate the evolution of a company by

revenues, by profits, or by many other types of accounting measures. However, the most

important measure for a financial investment is the risk, subdivided in many risk factors.

For a VC investment, the distinction between an early and a middle stage company is when

technology is “de-risked”. This means the technology used for the core business of a start-up

is not a risk factor anymore. The execution risk is still existing but the main risk factor is now

avoided or under control. The management does not have to worry about the technological

part of the business, leaving time for them to focus on the improvement of the executional part.

A company at this stage may need some money to invest in new facilities, go international,

hire more people or buy more equipment. Many companies are victims of their own success

and are easily running out of resources if their product works better than expected. A middle

stage investment can help this type of start-ups to satisfy the demand of their consumers and

to consolidated and/or expand their business.

An investment at this step has a clear objective: to help a company which is in a competitive

position to become a leader in the marketplace. When investors focus on a middle stage

business they expect it to become exceptional with more investments and external support.

Another reason for an investment at this stage could be the feeling of investors about the

success of a company. If they believe a company has good opportunities to become a leader,

they may want to invest in the company in order to be part of the future success.

It is hard for Love money and Angel investors to afford the amount of investment at this stage.

As middle stage companies are already established and are running quite well, the investment

is much higher than for the two first stages of a company lifecycle. Therefore, the main

investors are VCs and their frequent customers such as non-profit institutions (mainly

universities and pension funds) and big corporations.


1.1.2.4 Late stage

A late stage investment in a start-up is the final step, usually symbol of success. This late

financing is provided by a VC when a start-up has reached a strong position on the market,

with a product or a service widely distributed and a success already recognized. It occurs when

there is visibility into an exit. The financial health of the business is not to be proven anymore

and the only remaining question is how far this company can continue to grow.

Late-stage investors look for companies with revenues of at least $10 million. Usual investors

at this level expect a three to five hundred percent return on a period of about 5 years.

This investment associates the lowest risk of a company’s lifecycle with the fastest return on

investment. However, this stage represents also the highest investment in the VC industry,

with amounts going up to several tens of millions.

The key success factor for a company in order to attract late-stage investors is to have a solid

plan. This plan has to explain how you are willing to deal with the small companies entering

the market and the big players already established. If a team is able to prove to investors how

strong their business plan is, how competitive is their advantage and how they can be better

than the competitors, the late investment agreement can be concluded.

A VC investing at a late stage will usually end up by helping the management of the start up

to find out some additional processes, services or key employees in order to help the business

to reach the top position on the market.

This step is the final step of investment in start-ups and. The next step is the exit, typically

done through a sale, a merger, or an IPO. This is what happened for instance with Facebook

when the company launched its capital in the stock market. It is called Initial Public Offering

(IPO), it means the start-up has grown enough to enter in the stock market and to open the

access to its capital to the general public. Anyway, when a start-up reaches the late-stage of

its lifecycle, it is a promise of successful and prosperous business.

1.2 The investors

Investors are a key component of a successful company. As explained in the previous section,

it is hard for an entrepreneur to finance alone an entire business, especially when a business

is growing up faster than expected.

Different types of investor groups have been created over time. Their objective is to support

start-ups in a financial and/or non-financial way. Those groups can be official networks of


investors, such as the ones created by VCs, as well as private investors aiming at a similar

objective, such as Love money or Angel investors.

Each investor group has different objectives and expectations. Accordingly, they have different

roles in the investment process. This section will detail the main characteristics, roles and

expectations of each type of investor group.

1.2.1 Love Money

When an entrepreneur is willing to create a company, the first thing to do is to look for capital.

If no private capital is available, an entrepreneur will have to find sources of capital. Before

looking for external sources or capital, it is natural to look around its own private network. This

network includes mainly the family, the friends and the fools, also known as 3F or Love money

investors.

Love money investors represent the closest relations of an entrepreneur, people who love

them (or their project). Some companies will never go further or look for other types of

investors. Love money is fundamental for a company. It can be money borrowed from a

mother, a brother, a best friend or a relation interested in your project. Sometimes the amount

of money collected by love money investors is enough to start and to run a successful

business.

Among start-ups, VCs and Angel investors are popular. However, the money provided by the

members of the entrepreneurs’ private networks is often neglected in the description of the

fund raising process. This type of early-funding stage is commonly considered as pre-angel

funding, and this is the basis for the creation of a company’s capital.

In contrast with the other ways of financing, this is the one everybody will look for. Other types

of investors such as Angels or VCs are available but not always requested by start-ups.

Love money is an important source of financing all over the world, reaching areas where

financial industries are not willing or able to invest. Thanks to this range of investors, small

companies are growing everywhere, in every type of industry and in regions where nobody

was expecting to find new technologies some decades ago.

The main difference with this type of capital is the decision making process. When Love money

investors provide money to a start-up, the decision is based on qualitative arguments rather

than formal analysis. For a first experience in a fund raising process, it is easier to start to

collaborate with Love money investors, as I will show by detailing them one by one.


1.2.1.1 Families

Families are generally willing to provide money because of an emotional link with an

entrepreneur. Most of the time, family members will not look into the details of the investment.

Young entrepreneurs willing to set up a business are used to ask money to their parents or

direct family. If family networks are able to do provide capital, the decision making process is

generally based on trust and personal criteria. Moreover, most of the time, they lend money

without any interest rate as they are not willing to make profit from the lending. They invest in

order to contribute to the success of the project because they love the entrepreneur.

The idea of risk analysis is generally not present at this stage. Families are not frequent

investors, many of them are involved for the first time in an investment process and do not

know much about the financial industry. Sometimes, they do an implicit risk analysis by thinking

about the entrepreneurs’ background, taking into account the level of education, professional

experiences and past successes.

When the entrepreneur explains the project, the family is usually proud and willing to push the

project. Once the family members are emotionally involved in the project, the goal of the family

investment is achieved. A certain amount of money is collected, provided to the entrepreneur

and invested in the creation of a start-up. At this point, the start-up is at a seed stage, trying to

develop an idea or a prototype. The money provided by the family (and maybe also by friends

or fools) will help the start up to grow up to an early-stage level (cf. 1.1.2 Investment stages).

1.2.1.2 Friends

Friends, as families, are willing to invest money based on an emotional criteria rather than a

profit oriented one. They consider this type of investment because they trust their friend(s).

Friends’ investors are generally providing capital because they believe in the entrepreneur

more than in the business itself. The relationship is based on past experiences and the risk

analysis is done at a basic degree (education level, professional experience, range of skills).

Sometimes, high-skilled or passionate friends can get involved in the project and therefore

become partners of the project, but this is still an exception more than a rule. Their main role

as investors is to provide a financial contribution for the creation of their friends’ start-ups.

As families and friends are generally not qualified in their field of investment and not frequently

involved in financial activities, this type of investors is often neglected in the financial world.

Yet, they do not raise huge amounts (generally they raise less than USD 50’000) but they are

the starting point of almost every company.


1.2.1.3 Fools

Fools, in contrast with family and friends, are considered as skilled investors. Their decision

making process is based on the project itself.

They invest because they believe the entrepreneur is able to manage a successful company

and develop a profitable business. They know the start-up needs funding to be successful and

they are able to provide the missing tools. Besides, they are more likely to understand the

procedures and to provide necessaries advices or services.

They are also part of the entrepreneurs’ private networks, in a direct or indirect way. They can

be a friend of the family, a work relation or even a third party who knows the entrepreneur only

by word of mouth. They usually hear about interesting projects and look for the details. If they

think one idea may worth the investment, they start their risk analysis.

For the first time, an entrepreneur has to develop and detail the financing plan of its project in

order to obtain funding. Fools investors do not rely on personal criteria, they need clear and

tangible business arguments to take a final investment decision.

1.2.2 Angel Investors

The name of this group of investors comes from a simple idea: when an angel is needed, as

entrepreneurs are used to say when they need help in order to boost their little business, Angel

investors are there to help. They are private investors with a financial capacity higher than

Love money investors’ one. Moreover, they are generally experts or highly specialized in the

field they invest so that they can provide their expertise and networks to young entrepreneurs

entering the market.

Angel investors are commonly called Business Angels (BA). The first angel investors were

wealthy families, such as the Rockefellers’ family, investing in private companies before the

Second World War. The trend was to provide money to companies in order to help their

business growth and then benefit from their profits. Since then, the concept evolved a lot but

the principle is still the same: Angel investors invest their money in young companies and they

receive some profits from them if their business turn out to be successful.

They are the second actor in the investment cycle after the “love money” investors. They have

no direct link with the owner of the company, they may know each other but they are not

considered as friends or part of the family. Their aim is to fill the equity gap of the companies.

The amount of investment can vary between $100’000 to $500’000. The amount of the gap at

this step is, most of the time, not affordable for friends, families or fools and the profits


generated are too low to satisfy the different investment funds available on the market.

Therefore, angel investors are a key success factor for any start up looking for external funding.

The Angel Capital analysis is much more flexible than the Venture Capital one, mainly due to

the amount of investment. As explained during this thesis, the later you invest, the more you

need to invest. VCs invest higher amounts than Angels and this is why they are stricter with

their investment procedures.

Typical Angel investors are part of Angel investment networks (BANs, Business Angel

Networks), made of private investors willing to do Angel investments. Their aim is to select

start-ups and to connect them with suitable business angels. By creating BANs, they become

stronger and their fund raising opportunities are multiplied. Some BANs are able to raise

millions of USD.

The overall investment amounts of the VC industry are much more important than the Angels’

ones. However, this is not a problem for them. It leaves the possibility of choice of partner for

entrepreneurs. Sometimes, Love money, Angel investors and VCs interact in the same areas

but they have clear and different expectations so they are not annoyed by that. They are

players in the same market but they are complementary to each other.

The concept of Angel investment is based on investments at a critical step of a business with

a substantial support in terms of coaching and development. It is considered as a personal

investment and Angels are not considered as typical financial investors.

Angel investors play a special role in the investment process. They make the link between a

small capital provided by close relations (love money) and a huge capital provided by

investment companies (such as ventures). They also provide capital to companies that have

not yet reached the requirements of corporate and/or public investors. Angel investments are

substantial for the investment cycle of companies around the world. They exist since more

than 70 years and they are not willing to disappear. Their business is in constant evolution.

1.2.3 Venture Capital

Basically, the concept of venture capitalists is simple: they provide capital to entrepreneurs

and they receive a part of the profits generated by their business. They usually operate in niche

markets, or segments of markets where traditional financing is not available or suitable for

different reasons.

The Venture Capital industry exists since more than 60 years, with companies established at

the end of the Second World War such as J.H. Whitney & Company and American Research


& Development Corporation (ARCD), both founded in 1946.3 Those companies were

specialized in early and seed capital investments. In 25 years, ARCD raised funds for more

than hundred companies and earned more than 15% annual returns.

Some legends, as Arthur Rock, Tommy Davis, and some other pioneers in the VC field, were

successful thanks to their investment in the computer industry. At the time, they already

understood the importance of the support given to their start-ups, providing capital, experience

and advices at the same time.

Nowadays, companies operating in completely different industries are starting entering the VC

industry. As an example, Google, which is an internet-related company, decided to create its

own Venture entity. Google ventures was created as a VC division in 2009 and is now funding

for $300 million annually, mainly for early and mid-stage companies. They are also considering

projects of late-stage investment funds for a near future.

Venture capital is a source of financing for new businesses. VCs invest when they see a

significant growth potential in a company. They are not credit institutions, their aim is not to

finance every new company with growth opportunities. They look for exceptional, innovative

and futuristic ideas. They have a clear vision and mission: drive the entrepreneurs of today to

the success of tomorrow.

They are an important source of capital for innovative start-ups. Those companies have

difficulties to find investors and are usually looking for risky capital with high potential return,

called Risk Capital. Venture capital investments are actually Risk Capital investments, also

due to the challenges linked with new technologies, new markets and new ideas not yet

established in the market. Their investee companies (the start-ups) need high risk capital and

the investors expect a high return in the long run, and they are usually right.

Two types of financial investments are available in the VC industry. The first is called

“Milestone financing”, where the full amount of capital is provided upfront. The second one is

called “Round financing”, which suggests a financing by rounds, at different levels of the

company’s evolution. The best known method is the second one, as it is safer for a VC to

control the supply of capital step by step. Thanks to a step-by-step investment process, VCs

are able to interrupt the supply if an unexpected problem occurs.

Almost every Venture Capital Fund is invested for at least 10 years. This long period of

investment provides a unique opportunity of development and expansion for the start-ups.

Instead of asking high returns in a short period, VCs prefer to let the start-ups focus on a

3 Intermational Private Equity by Eli Talmor and Florine Vasvari, John Wiley & sons, 2011


sustainable approach that will generate profits in the long run, even if during the first years they

are not profitable.

The business of VCs is based on managing funds with sufficient returns at acceptable risks4.

This seems easy to say, but it is far more difficult to execute. The first key success factor of

their business, is the investment period and the autonomy allowed by VC’s investors. The

second is the potential of growth and investment, other than financial, such as coaching or

networking. Even though VC investments are not always profitable, the direct communication

between VCs and start-ups is a key source of trust and success that benefits day after day to

this kind of investments.

To manage a sustainable business, the investments are organized in “investment pools” for

businesses. As mentioned before, not every company will be successful, the eggs need to be

in different baskets. The idea is to differentiate the investments, as wealth managers are used

to do in the financial market with funds made of stocks, bonds and other types of products.

The difference with VC’s investments is the variety of their funds: they invest in shares of

different companies instead of investing in different financial products.

When they invest, customers choose the VC where they invest, not the start-ups. They invest

in funds, which are pools made of the combination of their portfolio’s companies (the start-ups

where the VCs invest). The differentiation is done by each VC when they select the companies

that will be in the funds. Some VCs are specialized in certain types of industries. They get

profits by balancing the success of some start-ups with the failures of the rest of the fund.

Those pools are called “Venture Capital Funds” (VCFs).

1.2.3.1 Venture Capital Funds

Venture Capital Funds (VFCs) are a subset of Private Equity Funds (PEFs). They are

investment funds provided by VCs, made of several investments done in different start-ups

which are part of VCs’ portfolios.

They are structured like limited partnerships. As VCs consider the start-ups where they invest

as partners, they provide necessary capital and significant knowledge by giving financial,

administrative and strategic advices. They aim to facilitate the business of their investees by

providing them new opportunities and networks. The final objective is to have a win-win

situation: start-ups grow, make benefits and VCFs satisfy their investors with positive returns

made of the balance of the profits of the different start-ups.

4 How Venture Capital works, by Bob Zider, Harvard Business Review, 1998.


Two types of partners interact in the investment process: General partners (GPs) and limited

partners (LPs). GPs are in charge of the management of the fund whereas LPs provide most

of the fund’s capital. LPs are passive partners, they are not involved in the decision-making

process of their investment, and their unique role is to provide capital. GPs have the exclusivity

on how, where, when and how long to invest the fund’s capital.

As other private equity funds, they are “close-ended” funds. They have a finite deadline and

investors cannot withdraw their money before, in contrast with other types of investments

where funds are available at any time. Moreover, they are clearly differentiated from other

funds thanks to their special characteristics.

The first characteristic is the lifetime, usually of ten years with a provision to extend the

partnership up to four years more. The second one is the type of investments, mainly done in

illiquid private companies. Eventually, least but not last, the fund’s lifecycle is structured in two

parts: the first three to five years, the capital is invested in the different start-ups (remember

that capital is usually provided step-by-step, to ensure that start-ups achieve objectives agreed

with the VC before receiving new capital). Then, the GPs manage and progressively liquidate

the investments. They terminate the limited-partnership during the ten to fourteen years period.

Basically, VCs created VCFs made of their portfolio’s start-ups. Some VCs differentiate

themselves by focusing on special industries. However, most of them deal with several

different industries and have only one fund including all the start-ups.

Nowadays, many customers want to focus their investments in specific industries, therefore,

VCs start to elaborate industry-specific VCFs. The objective of this new type of funds is to

attract investors which are willing to focus on one field and are not ready to invest at an early

stage in companies which are not matching with their investment profile.

Profits generated by VCFs are also due to the liquidation of their investments, by doing Initial

Public Offering (IPO), sales or mergers. This allows VCs to have extraordinary returns with

relatively low risks, such as the profits made by Index Ventures with the sale of Skype for

several billions.

1.2.4 Crowd funding

Crowd funding represents networks of individuals willing to use their money to support other

people’s ideas. It is a collective cooperation most of the time made by social communities.

Those communities or networks are usually available online. People can pool their money

together through web sites displaying different types of ideas. The objective is to collect funds

from several individuals in order to create a pool of funding for start-ups.


This type of funding is inspired from the crowdsourcing concept. It refers to resources gathered

thanks to the contribution of a large group of people. This alternative funding allows random

people to become part of a group of investors and to benefit from the success of their

investment without having to invest huge amounts of money.

Start-ups are fond of this type of funding, which enables them to raise small amounts of money

without having to go through complex financing processes. Moreover, as the capital comes

from a large range of people, the start-up will not end-up by having a majority of shares hold

by a single investor. A company financed by crowd funding has more freedom of decisions

than a venture-backed one.

Crowd funding investors are not officially part of the financing industry, no common basis are

established as every network defines its rules. They are individuals looking for investment

opportunities. When they find it, they invest small amounts of money in ideas that appeal them,

for different types of reasons. Those small amounts pooled together end up by being important

amounts able to create start-ups or to expand the business of existing ones.

The trend is evolving pretty fast in the last decade and is now available for almost every type

of industry. Indeed, fan-based networks are now emerging all over the world. Sport-clubs,

singers, movies, beers, and many other types of products or services that people love are

starting to being financed by crowd funding.

This alternative way of financing enables new opportunities of business models. Nowadays,

some brands decided to mix their funding strategy with marketing and research. They do it

online, by offering several prototypes of products and asking actual or potential consumers to

finance the idea(s) they would like to see available on the market. Every idea has a minimum

amount of funding requested for the launch. Some ideas will never reach the amount

requested, some will overpass the objectives. The ideas reaching the funding objectives are

then launched, knowing that some consumers are already waiting for it.

1.3 Win-win situation

After having described the process, let’s talk about the benefits for each party involved. Indeed,

the purpose is to establish a win-win situation between investors and investees. This situation

is achieved when both parties are satisfied, as described below.

1.3.1 Benefit for the investors

The financial world is not a friendly one. However, the Venture Capital industry enables

investors to have direct relations with the companies where they invest. They have the privilege

to work with passionate people, to be implicated in radical changes and worldwide innovations.


Do you imagine yourself contributing to change the world by being involved in the creation of

a company that may help people with disabilities to be able to walk again? I believe this benefit

goes far beyond a pure financial benefit. By investing money in the VC industry, investors are

contributing to the future of our world and to the global economy at the same time.

Furthermore, a VC investment is the one where the combination of the performance and the

added value is the highest. The performance opportunities of the VC industry’s assets is the

key that attracts worldwide investors.

Even though the VC industry proved to be profitable, early stage companies produced better

or even exceptional returns on investment than the rest of the industry in the last decades. The

table below shows the clear difference of profits between early and late stage companies. The

earlier you invest in a company, the higher yield of investment you can have.

Returns on investments are different depending on the stages of investment. Thomson

Venture Economics and the NVCA did a research based on 1750 VCFs in the US in 2008. The

funds were invested in all types of industries. Over the past ten and twenty years, the best

returns came from early and seed stages investments.

As mentioned before, ten years is the usual period of investment for a VCF. Companies,

especially early and seed stages, need time to develop a sustainable and profitable

management. Therefore, the important columns are the two last ones (ten and twenty years).

The significant difference of profits can be explained by their size of early and seed companies.

A small company has a better ability to adapt and respond to the changes in the market needs.

Moreover, a small company evolves relatively faster than a big company. In terms of profits,

an early investment can be an excellent option.

What works well in the deal between investors and investees is the relation that can be created

thanks to the investment at an early stage of a business. Obviously, at first there is a financial


interest and investors are, for most of them, not really interested on the start-up itself. However,

by the time, investors can see a high-growth and may start having a personal interest in the

company.

Some companies prove to be jackpots and sometimes investors decide to go further and they

invest themselves in companies that where at first just financial investments. They have a

better access to the information and they are usually privileged if they want to reinvest in the

company after some years.

On top of that, they invest in something considered as “socially good”. By investing in the VC

industry, you create jobs, pay wages, contribute to the economy, promote development of new

technologies and the money you invest is directly injected in the monetary system.

Nowadays, too many people invest in “paper money” or “debt money”, which is the virtual

money that transits every day all around the world in the financial markets. By selling or buying

a stock, the only thing they do is to loose or to earn money for themselves but the company

that issued the share has no benefits on this transaction.

In other words, when people deal in financial markets they are not adding any kind of real

value, they are just speculating on companies that are eventually forced to deal with the

pressure of the market. In comparison with a widespread way of investment, the Venture

Capital investment represents nowadays a type of business that creates a real added-value

for the community in a healthy and sustainable way.

1.3.2 Benefit for the start up

World-wide recognized companies such as Google, Microsoft or Zynga, are Venture Capital

backed companies. Some years ago, those companies were only start-ups looking for capital.

Thanks to Love money’s, Angels’ and VCs’ investments, they are now considered as symbols

of our daily life. As an example, who never heard the expression “let’s google it”? It seems

hard to believe but this company also started from the bottom by looking for Risk Capital as

any other start-up and it is now a world reference.

Love money and Angel investors are essential for the success of a young company. However,

VCs’ role is much more important in terms of amounts of investments and involvement in the

companies’ evolution. The VC industry was involved in the creation of most of the main

technologies and trends of our times. They fulfill the equity gaps of companies that have good

growth potential but financial and/or technical difficulties to reach their objectives.


Even though a single entrepreneur has enough money to set up a business alone, investors

and partners are important for a successful business. If the business wants to grow, the

knowledge of only one person may not be enough.

The clear benefit for a start-up looking for external capital is the additional opportunities the

entrepreneur will get by collaborating with the investors. The networks, the advices, the human

capital and the experience provided by investors, especially by VCs, has definitely a positive

impact on the business. This impact can be noticed by comparing VC-backed companies with

non-VC-backed companies. The speed of growth and the period before the entrance of the

products on the markets are clearly accelerated and improved by VC investments.5

A competitive advantage for a start-up is the collaboration with experts already established in

the field. This effect has been identified since the first investments in start-ups before the

Second World War. When young entrepreneurs are willing to enter a market, they may have

brilliant ideas and futuristic visions but the expertise provided by seniors in the field is priceless.

The merger of a young vision with an old expertise has always been a key success factor in

the evolution of new technologies and trends around the world.

Nowadays, some projects are based on the collaboration, the coaching and the supervision of

young entrepreneurs by experts in their field. In France, for instance, the government put in

place a system of exchange of senior employees and retired employees with local SMEs. The

aim is to boost and provide high quality expertise to new entrepreneurs of the country.

Governments are aware of the importance of investing in start-ups also in a non-financial way.

5 Hellman and Puri, 2002, Strömberg, 2009


1.4 Key statistics

Nowadays, the Venture Capital industry is mainly based in the US (see appendix 1). However,

the future may drive the business in a different direction. The following statistics are useful in

order to understand the future trends and the current situation of the market.

The related tables and figures can be found in the appendices.

Historical trend

In the late 90’s, the investment in start-ups was a well-known trend, especially in the US. The

highest level of VC’s investments was before the dot.com bubble. Since then, the industry is

trying to recover. After almost ten years of struggle, the crisis of 2008 represented the final

blow for many VCs. Despite these two factors, the market is now recovering and the

amounts invested in start-ups are increasing again. This period of time was the end of many

VCs but also enabled some of them to become the references of the current market. (see

appendix 2)

Fundraising statistics

Despite the crisis, the VCs’ business is running well. Indeed, after a decrease of the number

of funds raised between 2008 and 2009, the industry is in constant increase. Moreover, the

amount of money raised in the US in 2012 is over 20 billion of USD, which represents 80% of

the amounts collected before the crisis. This shows a clear improvement over the years and

predicts a good future for start-ups looking for first or additional funding. (See appendix 3)

Stock market entrance in 2012/2013

The NVCA statistics corresponding to venture-backed IPO’s in the US market in 2012 and

early 2013 indicate two main sectors of interest: Life sciences and Information technology.

Companies in those industries are a main focus of investors. Their attractiveness is in constant

evaluation, mainly thanks to their potential of growth and their global impact. (See appendix 4)

The development of those industries and the opportunities linked with the potential success of

their projects are a key interest for investors around the world. The future of VC investments

is closely linked with the future of those two industries as well as with ours.

Investors’ expectations:

Investors are willing to increase their investment in new markets, especially in China, India and

Brazil. Therefore, VCs are expected to broaden their geographical coverage to include


emerging markets. This trend is part of the globalization effect, which will probably make the

industry evolve into a less centralized market.


2. Case studies

Now that the basics of the investment in start-ups have been explained, I would like to

introduce some real cases. The best way to understand and to link all the previous information

is to see concretely how it works in the real life.

This section presents four case studies based on personal interviews. It is divided in two parts:

the first one is a brief description of two Swiss VCs, whereas the second one includes the

cases of two start-ups based in Switzerland.

2.1 Venture Capital companies

Within the framework of my research, I had the pleasure to interview two co-founders of well-

known VCs. Both are established in Geneva and were founded by Swiss entrepreneurs. Those

interviews took place at the beginning of my research and they were instrumental for me to

identify key aspects of the industry.

The information they shared with me was in line with the literature review done previously.

However, it allowed me to link theory and practice. Before the interviews, I only had a

theoretical background and some details were still unclear in my mind. While discovering their

business and their companies, I also discovered some practical aspects of the VC industry.

The interviews were the starting point of my redaction. After having a live explanation of the

topic made by two experts of the field, the structure of my thesis became almost obvious. The

talks were split between general explanations and detailed questions.

Most of the data included in this thesis come directly from the interviews. The information

provided by those two Swiss capital riskers was far more detailed and interesting than what I

found in books, papers or online publications. Therefore, I decided to spread the information

in the different sections and to make a little overview of these two VCs.

2.1.1 Endeavour Vision

Interview with Bernad Vogel, co-founder of Endeavour Vision

Endeavour Vision is a Venture Capital company focusing on breakthrough technologies. They

look for start-ups that change our way of living. They are 9 employees and they have twenty

companies in their portfolio. They are experts in the fields where they invest and they generally

spend one day per week managing their investments.

Basically, they created a global fund with all their start-ups, as they were used to invest only in

the technological sector. Over the years, they started to focus also on life science, with two


sub-sectors: biotech (bio technology) & medtech (medical technology). Consequently, some

of their customers are now willing to invest only in one of the 3 sectors. In order to improve

their customers’ satisfaction, they are now working on splitting the main fund actually offered

in different funds focusing on their different topics.

Their strategy is also linked with the evolution of the market and the stage of the companies

where they invest. They are used to invest in seed or early stages, which are types of

investments requiring a small amount of capital. This enables the VC to invest in several

companies. By doing this, they can easily diversify the risk in their funds, increasing their

potential of success. If they decide to invest in middle or growth stages companies, the amount

of investment becomes more important and it becomes difficult to invest in several companies.

Therefore, the funds are less diversified. The later they invest in a company, the more the fund

will be specialized in a certain field, and the more the amount of investment will be high.

Concretely, they offer an investment strategy. Many customers are interested in the fields

where Endeavour invests. However, they are not experts and they only know what they see or

read in the newspapers. The role of Endeavour is to inform their costumers about the market

evolution, the new technologies and the growth opportunities for the fund. They describe

everything in detail: what industry, what type of company, what stage, what size. Some

modifications may be done due to a specific customer request.

The specificity of Endeavour Vision is the exclusivity of their offer and their high expertise. The

employees have close relations with their investees, based on trust and collaboration. Their

investors are satisfied and their business is prosperous.

2.1.2 Index Ventures

Interview with David Rimmer, co-founder of Index Ventures

Index Ventures is the biggest Swiss Venture Capital company, founded in 1996 by a team of

three entrepreneurs. Nowadays, they are thirteen partners with a large variety of backgrounds

and skills. When they invest in a start-up, all the partners contribute to the success of the

investment by providing their networks, advice, skills and resources. They financed start-ups

such as Skype, MySQL or Dropbox. Thanks to Index Ventures’ expertise, those companies

became quickly big players in their own market sector.

The company has now a worldwide recognition, with offices in London, Jersey and San

Francisco for a total of 65 employees. They currently offer several types of VCFs, focusing on

different industries and different stages of start-ups life-cycle. The funds are raised every three

years.


When they look for new start-ups to invest in, they tend to focus on companies willing to have

a global impact. Many companies financed at a seed stage by Index Ventures are nowadays

companies with more than 500 employees. Even though they do not do business for the

purpose of creating jobs, they believe in the “Risk Capital Model”. In other words, they believe

their industry is a growth engine for the global economy, such as the creation of new jobs. This

is not their main goal but by doing business the way they do it, they are not the only

beneficiaries of their success. Even if you want to believe in something you need money to

make things change. By doing money for their customers, they create new jobs, new

technologies and they change the world with the values they believe in.

They differentiate themselves by being a global VC, active in Europe as well as in the US.

They have a clear management and investment style associated with a strong mission. Indeed,

the company was created with the purpose of driving the Risk Capital Model from the US to

Europe. As 95% of the VC investments are in the US, they compete in the 5 % European and

95% US. They are more leaders than followers, well-known and recognized worldwide for their

technological challenges.

When they look for new investment opportunities, they look for projects giving an answer to a

critical problem. A good technology, better than another one, is not enough. The project needs

to be clear, to have a strong differentiation on the market and an incremental gain opportunity.

They generally invest if they find an appealing project driven by a company looking for an

important market, with a possibility of getting a substantial part of this important market. This

is not an exact science, they cannot be sure to be successful with every company they finance.

To reduce the risk of failure, they analyze the industry, the market, the idea and the team. If

they feel something really enthusiastic behind the project, they take the necessary risk in order

to have substantial profits by investing in innovative ideas. The size of the market is an

important criteria, but the team analysis is crucial for the decision making.

Many of their customers have teams specialized in the VC industry, as 90% of their customers

are institutional customers which have no time to deal with their financial investments. Due to

the nature of the funds, the investment managers needs to be sure and aware of the

investment. They cannot change their mind after some years. It is too long term to give this

decision to a generalist. Most of their customers manage huge amounts of capitals and they

invest only a small part of their money in VCFs.

If the management of the institutional customers is in constant change they do not know really

each other. However, some customers are investing with Index Ventures since more than

fifteen years. Therefore, they know each other pretty good. Usually, if they have a good return


on investment, they are happy. Obviously, the performance matters, but as a general rule Index

Ventures’ investors are satisfied.

2.2 Start-ups

I had the opportunity to interview different entrepreneurs within the framework of my thesis. All

of them have an experience in the fundraising process and some of them are still looking for

additional funding.

The companies I will present are all Swiss start-ups based in the canton of Vaud and the

information is based on personal interviews with their founders or co-founders.

As mentioned previously, the evolution of a start-up is not something defined, each case can

differ from a similar one. Therefore, the case studies will detail different topics depending on

the past experience and the life-cycle stage of each company. However, in order to have a

common basis, both case studies will begin with a description of the company and will end up

by a brief explanation of their current situation and their future projects. Moreover, the critical

points of the development of each start-up will be highlighted.

The findings and lessons learned from the case studies will be split in the different parts of the

following section, which is the guideline for start-ups.

2.2.1 Mindmaze

The company

Mindmaze is a young start-up of 12 employees based in Ecublens, near Lausanne, in

Switzerland. Their business is part of the med-tech industry. They are building a

neurotechnology platform in order to bring brain technology to people’s homes. More

specifically, to use medical technology in order to help patients with movement deficits in their

daily life. The platform combines information from the brain and the muscles with feedbacks

made by computers graphics. Those feedbacks are given by animations such as 3D avatars,

in order to make it fun. They want people to interact easily with their interfaces.

The specificity of the start-up is the integration of virtual reality in the brain technology market.

They integrate it by using the next generation of neural interfaces, usually well-known for being

able to control daily devices (such as cars, TVs, phones, and many other things) only with the

brain. This is not science fiction, it does exist, brain technology is evolving pretty fast these last

decades. However, their purpose is medical and their company wants to focus on the

possibility of adapting those devices for the rehabilitation of patients, to help them to recover

quick, even quicker than what they experience in some hospitals nowadays.


The first product they will launch is mainly aimed at patients with movement deficits usually

due to a stroke, an accident or an amputation for instance. The business and the product

are already certified by the CE (European certification) for medical devices and the ISO13485.

This first product is classified as a class 1 device in the CE categories, which implies the lowest

range of certification requested. They decided to start with this device also because the cost

link with this certification is lower than for other types of devices.

The idea came while wondering about the length of the recovering period and the lack of

available time of therapists for patients. A clear need of improvement of the recovering

conditions was identified by Mr Tej Tadi. He believed the recovery period of patients could be

shortened by giving them a better support, adapted to their daily life.

When the prototype was elaborated, the objective was to have a product compatible with the

evolution of the recovery. While having this brilliant idea, the analysis of the competition

became quite large, as they are now competing with medical devices producers, hospitals and

therapists at the same time.

The concept

The concept is to create incentives in order to stimulate brain’s zones that help patients to

recover quicker. Concretely, they conceived motivational devices able to reproduce the

patients’ movements, in a virtual or a physical way.

The virtual way is a visual support to stimulate the brain. Virtual 3D avatars representing the

patients are there to motivate them. By seeing the progress of their avatar, they can see their

own progress and get motivated to continue to train and to recover.

The physical way is based on a progressive scale system. Physical devices are there to push

the patient’s experience forward. It has been proven, movement deficits are reduced by

improving the level of motivation of the patients. For instance, if the patient is able to raise its

arm 5 cm, the device will push its arm 5 cm higher. This will end up by encouraging them to

overpass their limits.

The differentiation

In order to face the market challenges, the start-up develops a unique concept and

differentiates itself from competition by having devices that are able to support patients from

their arrival to the hospital until the day they go back home. Mindmaze is the only one in the

market providing diagnostic and therapy at the same time with a high quality performance and

affordable prices.


Furthermore, they have a highly developed software with scalable revenues and an innovative

hardware combined with neuroscience. This is an innovation, a surprising mix of two different

industries likely to be successful and replicated in the future. The patients enjoy doing their

therapy thanks to their motivational devices.

2008: The roots

Tej Tadi, the CEO, founded Mindmaze by himself. He came up with the idea in 2008, while he

was doing his PhD. He already had a master in Virtual Reality and Computer Graphics but he

wanted to focus on the potential of the combination of neuroscience with virtual reality.

He was initially alone in his idea and he had no business background. Therefore, he decided

to learn by himself all the knowledge required in order to become a good entrepreneur. During

two years, between 2008 and 2010, he attended several events such as Venture Lab, Venture

Leader or Venture Kick, which are well-known networks that focus on the identification and

promotion of promising start-ups. Those different conferences helped him to familiarize with

the business and more especially the financing industry. An important aspect of the learning

process was to get used to the business vocabulary and the common terms.

Likewise, during this learning period, he was also doing networking and getting visibility in the

market. He hired some business consultants in the medical industry and started creating some

good networks.

2010/2011: Research and development

Thanks to the networking done during the two previous years, he finally got his first financing,

which was actually an organic funding. By organic, I mean a funding that was neither a loan

nor an investment.

This first funding was made of grants and foundations, provided by public institutions and

entrepreneurial networks. None of them was equity based, no payback expected, the purpose

of the first investors was to help the evolution of an idea that may change patients’ life. It made

sense for them to invest, they perceived Mindmaze’s cause as a social cause and they

provided money without looking for profit.

From a financial point of view, this first funding is not considered as an investment as there is

no payback of the capital invested and no profit made from the provision of capital. However,

from the start-up point of view, this was the first time they received capital and it gave them the

financial resources requested for the creation of their business.


The company was officially created in 2011, thanks to the first funding. The start-up was

starting to be familiar with the market and the business strategy was established.

The first employees were hired and research and development was the main focus. The

human resource had to stay coherent with the start-up’s budget. Right people had to be chosen

for the key positions, in some cases, it was preferable to hire a consultant for a definite period

of time. The first prototypes were created and consequently protected by the creation of their

patent portfolio (a portfolio including all their intellectual property rights).

When prototypes were created, two main analysis were done: the consumer needs and the

usability test of the product itself. The first analysis was about a direct entrance in the market,

an immediate need that can be fulfilled. The second one refers to a long run criteria, it analyzes

the likelihood of the product to be accepted, adopted and eventually to become part of

consumers’ daily life.

In the case of those medical devices, the test was done by providing some devices to therapists

or hospitals and let them use it for free in their daily work with their patients. The objective was

to receive feedback about the usage, the performance, the design, the reactions of the

patients, and related issues.

2012: Industrialization

In 2012, the research and development phase was successfully completed and the

industrialization phase could begin.

First of all, the product had to be certified by the CE and ISO 13485. The certification process

took approximately one year, which is quite a short period compared to other companies.

Indeed, thanks to its small size, a start-up has a better response to change, a higher degree

of adaptability and flexibility. This allowed Mindmaze to quickly adapt to the certification

requirements and in one year the two certifications were delivered.

Subsequently, the different production possibilities were considered. For cost efficiency

reasons, the manufacturing was eventually outsourced to Italy and France.

At the same time, the first clinical validation was done by the Centre Hospitalier Universitaire

Vaudois (CHUV). This validation is an ongoing process that assesses and confirms the quality

of the offer, the risk analysis and the procedures.

Also, during the same period, the Commission for Technology and Innovation (CTI) and some

national institutions provided additional grants.


2013: Commercialization

The first device will be sold in the Swiss market by the end of 2013. The missing step before

the launching of this first product is the commercialization. In order to have a successful

product commercialized, a correct pricing strategy needs to be established. The pricing

requires a complex analysis, especially in the medical industry. Typical medical devices are

not affordable for common customers, so they are usually bought by hospitals or therapists

and used for patients’ therapies.

The goal of Mindmaze is to get a product available for private customers (patients). The main

issue linked with their pricing strategy is to have a medical device that can be reimbursed by

health insurance. Reimbursement criteria are based on potential social, economic and clinical

outcomes. If insurances are willing to reimburse it, private customers will be more willing to

buy, use and recommend the Mindmaze’s device. However, not every country has health care

reimbursement systems. This is also an important factor to be considered when thinking about

where to commercialize the product.

The start-up received its first European grant beginning of 2013. During this year, the visibility

of Mindmaze on the market started to increase. They are now networking at European level

and their objectives of expansion are evolving.

While looking for new markets, opportunities have been detected in the US. A special American

standard called Food Drug Administration (FDA) is required to enter the US market. It is

expensive and it takes time to be implemented. Mindmaze is in the process of being certified

FDA in order to enter the US market.

Critical point

As explained before, therapists and hospitals are considered as a kind of competitors. When

the start-up was looking for collaboration, within the framework of the usability test, it was not

easy to make them use the Mindmaze device. Indeed, those new technologies may be

perceived as a future replacement, able to reproduce a human work with equal or even better

performance and quality.

Eventually, what makes the investment in this field kind of special, is the nature of their

purpose. At the end of the day, all the parties involved are interested in improving the medical

industry rather than improve their individual business. Mindmaze can count on the support and

collaboration of the medical sector in order to achieve the final objective.


Experience with early investors

For the moment, Mindmaze only had two official investors (without taking into account the

organic funding). The first amount capital was provided by a Love money investor, closely

followed by the second who was an Angel investor. They both invested in 2012 for a total

amount of CHF 500’000.-. This amount was split between convertible loans and equity

investments.

Investors invested in Mindmaze by personal interest, as they both knew somebody suffering

from neurological deficits. Their interest is the potential of the technology. Until today, they are

satisfied and they share a friendly relation with the start-up.

Despite the smooth running of the business, no VC investments have been made so far, but it

is not for lack of trying. A German institutional VC was already approached. Nevertheless, the

first hurdle was the unique investment they were willing to do, no long-run collaboration was

expected afterwards. Mindmaze is clearly aware of the importance of having long-run investors

that will support the business and be willing to reinvest when new funds will be required. The

second one was a mandatory time-line of presence of the start-up in Germany, required by the

VC. Eventually, the collaboration never came to fruition.

Despite this first experience with the VC industry, Mindmaze does not give up and is now

discussing with other VCs. The first VC investment may probably come within the next year.

Eventually, some small amounts of private investment have been provided. Those private

investors are part of the board of directors (B.O.D.) of the company. When Tej Tadi created

the B.O.D., he also negotiated with the members a certain participation in the company’s

capital. Indeed, if members invest their own capital in the company, they show a clear

commitment and support to the business. This investment has more influence on the image of

the start-up than on the capital itself.

Current situation and projects of the company

As mentioned before, Mindmaze is willing to expand its business to the US. The first device

will be available at the end of 2013. Ten pre-orders have already been made. The company’s

target is about 35 to 40 pre-orders before the official date of commercialization.

Some negotiations are also in progress with India, where the market opportunities are

increasing and the CE standard is accepted.

Two other devices are expected to be launched in a near future. The elaboration of those new

products depends mainly on the available resources and future profits of the start-up. The


strategy behind the three types of devices imagined by Mindmaze follows a simple idea: to

move from the medical market to the home market. But this is still a future project.

2.2.2 Aleva Neurotherapeutics

The company

Aleva Neurotherapeutics is a young start-up created in 2008 as a spin-off of the Ecole

Polytechnique Federale de Lausanne (EPFL). At the time, only two co-founders were involved

in the project: Andre Mercanzini, who was a PhD student, and Dr. Claudio Pollo, a

neurosurgeon. The company raised fourteen millions of CHF in five years, they are now a team

of ten people and they are certified ISO13485.

The idea came in 2006, when Andre was doing his PhD at the EPFL. During the drafting of his

thesis, he had the idea of developing better electrodes for brain stimulation by creating a

system of targeted brain stimulation. While wondering about his idea, he quickly recognized

the need of different knowledge and skills. This pushed him to look for partners and to

collaborate with Dr. Pollo.

Their business is part of the med-tech industry, focusing on the development of medical

technology. Their field of interest is neurology and their aim is to develop a next-generation

brain implants in order to treat brain diseases.

Concretely, they do it by implanting electrodes and recording data from diseased brains. Their

differentiation is the precision of the stimulation of their electrodes. They are now focusing on

the Parkinson disease but they would like to expand their technology to other types of brain

diseases.

From the beginning of the project, they were well supported by Andres Mercanzini’s PhD

director, Philippe Renaud. However, when the two co-founders had to create their business

plan, an external assistance has been required, and the business started as follows:

Elaboration of the business plan:

In order to build an attractive business plan, they attended some conferences called “Venture

Lab” given by the Commission for Technology and Innovation (CTI). Those lectures assisted

them in the elaboration of their business plan and their business strategy, which is not always

easy to define for entrepreneurs with scientific backgrounds.


Public funding:

Before looking for private external funding, they decided to look for public funding. Public

funding opportunities are different in every region of the world, the most common are subsidies

and loans with preferential terms or conditions.

Their business objectives and their technology have a clear benefit for the society. The return

on investment for this type of company goes beyond money, as their success may mean a

success in the fight against brain diseases. For all those reasons, they thought they had good

chances to get public funding, and they were right.

After approaching different sources of public financing, they finally met their first investor, the

Foundation for Technological Innovation (FIT). In 2008, the foundation provided 100’000.- of

CHF to Aleva Neurotherapeutics with no interest rate.

This capital has been the seed of the business and during two years the company was

developing the business thanks to this first amount of funding. After the two first years, the

business was evolving well and the perspectives of the company were growing.

First round financing:

In 2010, they started to collaborate with an entrepreneur called Jean-Pierre Rosat, which is

now the CEO of the company. During this same year he raised approximately two millions of

CHF through his love money’s and business angels’ networks.

The business had a clear boost and the clinical trials were developed, planned to be done in

December 2011. At this point, the company was still at an early stage. As mentioned before

(cf. 1.1.2 Investment stages), a company is at a middle stage when the technology is de-risked.

In the med-tech industry, a technology is de-risked when it has been clinically approved.

Venture Capitalists were also part of this first round of financing. They decided to provide

capital but in two steps, investing at first eight millions of CHF in 2011.

Second round financing:

The partnership between the start-up and the Venture Capitalists was successful, so they

invested four millions more in 2012. The three first VCs who invested in the start-up were Swiss

VCs, all focusing on life-science and bio-medical industries.

The discussions with VCs took many months, trying to get contacts and networks. Surprisingly,

the deal was concluded in only few weeks once Venture Capitalists knew how they will get

their money back. The future of the investment was the clear tipping point.


Investors get their money back after the termination of the investment. Termination is achieved

through exit strategies, generally by selling the start-ups. Only few entrepreneurs are able to

give a concrete exit strategy from the beginning of the negotiation with investors. By having

defined an exit strategy with three different potential buyers, Aleva Neurotherapeutics had a

clear competitive advantage. VCs had already a proof of compatibility of the offer and

profitability of the investment in case of successful technology.

Typical investors want to know how the investment will be terminated (how the start-up will be

sold) and approximately how many years it will take to get the returns and the investment back.

In order to give a clear overview of their situation, the entrepreneurs decided to do a

presentation for investors, which allowed them to facilitate the communication.

The key success factor of their presentation and their negotiation process was the tangible

proof behind every assumption they did. For every number they presented, they had an

explanation and a concrete unit of measure. Even though a start-up cannot give a tangible

proof a future success, they were able to give examples and real cases to support their

arguments.

On top of that, an expert in the field was able to certify that big companies of the industry will

be willing to buy the start-up in case of success. The networks and the references also had an

important role in the negotiation, as it is important for VCs to have convoyed and supported

entrepreneurs in their portfolio.

Critical point

When they were starting their business, they evaluated the costs linked with the ISO13485

certification (in order to produce themselves the electrodes). The cost was high and their

resources were limited, so they decided to look for a supplier with the necessary certification.

They started collaborating with a supplier that ended up by being unsuitable. The amount of

money used to fix the situation was finally more than what they had to pay for the certification.

Their fund raising process was successful, but the clinical trials were delayed due to their

issues with the supplier, in charge of the production of the electrodes. The switching of a

supplier can take months in some cases, and this is exactly what happened. Even so, they

solved the matter and the first trial started in December 2012, rather than 2011.

Investors do not like surprises, and the start-up is fully aware of this reality. A surprise such as

their trials’ delay may happen, but it has to be an exception rather than the rule.


Current situation and projects of the company

Until today, several clinical trials have been made with 7 patients and all of them were positives.

Their technology is being de-risked and their company is moving forward. They are now

recognized as a middle stage company with satisfied investors.

In 2013, Aleva Neurotherapeutics is willing to do a third round of financing. Existent investors

are willing to reinvest, they are satisfied of their investment and they believe in their success.

They also look for new investors around Europe. They participate to some events such as

European Venture conferences called “European Tech Tour”, where entrepreneurs do their

speech in front of dozens of VCs’ representatives. The best European start-ups are selected

and supported in their fund raising process.


3. Guidelines for start-ups

The aim of this thesis is to describe in a simple way the ideal fund-raising process and evolution

of a start-up. This final and special section is useful to any entrepreneur (or team of

entrepreneurs) willing to set up a successful business with sustainable collaborations.

Nowadays, too many entrepreneurs set up their business without being aware about even half

of the topics discussed in this thesis. Many of them end up by going bankrupt and in most

cases this could have been avoided.

Not everybody is willing to acquire financial knowledge, but everybody should have a basic

understanding about how to finance a start-up before launching any type of business.

During the elaboration of my thesis, I had the pleasure to interview four people involved in their

daily work or once in their carrier with an investment process in a start-up. Two of them are

partners of a VC company and the two others are entrepreneurs with experience in the fund-

raising process. Their different perspectives allowed me to build my own opinion and analysis

on what I believe are the main factors for a successful collaboration.

Entrepreneurs and investors, especially Venture Capitalists, are part of two different worlds

and sometimes their perspectives and expectations differ from A to Z. However, if they are

aware of the expectations of each other, they can easily find ways to agree and end up by

creating a win-win partnership. They have to listen, understand and collaborate together. To

do so, they need to have a clear vision of their different interests beforehand.

My goal is to give some tips, recommendations, check-lists, and other different types of tools

that can help entrepreneurs to succeed. The previous part of the thesis was the theoretical

background of the empirical part that follows. The success comes rarely by chance, a good

entrepreneur is also a good partner, a good employer and a good strategist. I do not pretend

to have all the keys of success, but based on my interviews and the research I have done, I

believe the main elements are those described in the sections below.

3.1 Advices

In order to have a common question with a large range of opinions and point of views, I asked

the same question at the end of each interview: What advice would you give to an entrepreneur

willing to succeed?

The following advices are based on the past experiences of each interviewee:

Build trust: Be honest, transparent and realistic.


Be accountable: Show your accountability by achieving what you commit to within the agreed

timeframe.

Analyze the market environment: Get the awareness from people having done a similar

project before. While doing a thorough literature review, identify a substantial market of

interest. Know your market and your industry, demonstrate expertise in your field.

Focus on funding: Take your time to build your project but keep centered around your key

goals. Look for initial funding before developing your business or your prototype.

Ensure private sector contribution: Even though public funding is a good starting point, try

to go for private investment as soon as you can.

Identify the human resource needs on an ongoing basis: Adapt the length of the

employment contracts to the company’s stage and requirements. Do not grant long term

contracts or try to employ from the beginning, it is sometimes better to hire consultants in your

field at first.

Get knowledgeable partners: Set up a good advisor board and senior management able to

identify the best strategies for your business.

Define a business a model and a clear market strategy: Focus on your business model and

your market strategy, monitor on a regular basis their status of implementation. If necessary,

readjust them, keeping in mind your final goals.

Motivate the managers to become shareholders/investors: Get the management to invest

in the start-up in order to give a certain level of credibility to the business. This increases the

external credibility and strengthens the image of the company.

Ensure your competitiveness: Identify or build fundamental competitive advantages, define

a unique selling proposition and a clear vision and mission.

Communicate your vision and mission: Explain the project clearly to investors, make sure

they fully understand and validate what your company wants to accomplish and how you plan

to achieve it.

Diversify the team-skills: Get on board complementary skills and knowledge. Do not fear to

work with more intelligent people.

Establish a common thread: Be aware of the expectations of each other in order to find an

area of common interest.


Add Real Value: Focus your business on the creation of real value, such as technological

innovation, rather than pure financial engineering.

Create networks: Contact the actors, identify possible partnerships, associate yourself with

already established companies and take their experience.

Be or become a leader: An entrepreneur needs to be a leader, good entrepreneurs become

managers by the time. The most important is to lead the team to the success. A start-up is a

company needing exceptional people ready to take the company further, making choices to be

successful.

Eventually, when you think about your market share, think about making the cake bigger, not necessarily the piece of cake.

3.2 Profile of an ideal entrepreneur

This section details the main characteristics sought by investors when looking for

entrepreneurs. By entrepreneurs, I mean also team of entrepreneurs. As a general rule,

investors prefer teams than individuals. Surveys showed that teams are more successful than

individual entrepreneurs, mainly due to the diversification of skills. Many competences are

requested when creating a company and different visions can lead to a better understanding

of the current situation.

The main skills, capacities and qualities that hold the attention of investors are the following:

No risk aversion: Ready to take risks to achieve its goals

Passionate: Involved with passion in the project

Clear vision: Is able to have a global view and is fully aware of the situation

Talent recognition: No fear of working or collaborate with people more intelligent than them

Proactive: Acts in advance, anticipates decisions

Ethic: Has moral principles integrated in its management strategy

Good reputation: provides references that show clearly its competence and skills

Skill-mix: Understand the need of variety of skills, allocates equity to other people

Flexible: Is able to quickly respond to changes, has a flexible management strategy

Coveted by investors: Gets along with investors’ groups, has a good visibility on the market

Realistic: Has reachable expectations about the processes and outcomes


Negotiator: Has a negotiation talent, tells cogent stories and is presentable and persuasive

Innovator: Is creative, considered as a forerunner, able to deliver profits and open doors

3.3 Key success factors

Key success factors are simple factors that are too often neglected during the elaboration of a

business plan. Here are the main factors highlighted during the research and the different

interviews:

Market analysis

A product (or service) has to fit consumers’ needs. Too many companies (even the biggest

ones) forget this simple concept. When you elaborate a product, you do it for your customers,

not for you. Even if your product is the best available in the market, if it does not fit their needs,

nobody will pay for it.

The first thing to do when you want to create a business is to analyze the market you want to

enter. By doing market research, interviews, consumers analysis, you can find ways to turn

your issues into advantages. This has to be done primarily, before even thinking about what

you will produce or provide to your consumers.

Do not wait for the golden idea

If you wait for the perfect condition, you will never get things done. A “golden idea” is a dream

sought since the dawn of time. It represents an idea that nobody had implemented before, with

a fantastic potential of success. However, this is a dream and too many people are waiting for

this “golden idea” in order to launch themselves in the world of entrepreneurship.

When products such as Coca-Cola or IPhone where launched, nobody was considering these

ideas as “golden ideas”. Their success was not yet guaranteed and the communities around

the world were not yet accustomed to this type of product.

Before the creation of the first dating website, nobody was even thinking of meeting someone

on the internet. At the time, many people thought meeting people on internet was dangerous.

Still, the online dating market is increasing year by year.

Those examples are there to show you that the most important is not the idea you have, it is

how you develop it and implement it in your daily business. Many entrepreneurs tried to launch

the same type of ideas, but only few on them ended up by having a successful business in the

long run. The idea is an important factor, but the key success factor is how you manage your

business.


Human resources selection

A start-up is a small company with a small number of employees. The recruitment of human

resources is a crucial step for the success of a start-up, more than for every other type of

company.

Every employee in every kind of business has to share the values and the vision of its

company. Though, a start-up has an additional constraint: the resources are limited and the

selection has to be coherent with the budget and the business objectives.

Some entrepreneurs want to evolve too fast. Therefore, they hire talents that may be useful

afterwards but that are pointless in the first two or three years of business. The important thing

is to know what skill are required at what step and to stick to that primary analysis, at least for

the first years of business. While business evolves, the human resources evolve consequently.

Also, the recruitment of senior managers is an important factor of the human resources

selection. A start-up will always benefit from the knowledge of a senior employee having an

experience in the targeted market. However, as they require higher wages, an entrepreneur

needs to make sure about the necessity of those employees. Having too much senior positions

is counter-productive and is usually not affordable for a start-up budget.

Financial awareness

A good entrepreneur is always aware of the financial situation of its company. A clear book-

keeping is a key success factor but also a key tool for future investments. The implementation

of a measurement system of cash flows, work in process, stocks and returns, facilitates the

understanding and forecasting of the possibilities of the start-up in a near future.

As explained before, the main issue for a start-up looking for funding is to provide a proof of

profitability. Yet, by having clear records and a full financial awareness of the business, an

entrepreneur improves the chances of gathering new funds.

Pricing/Competition analysis

A critical point when a start-up enters a market is the setting of the price. It is really important

for a start-up to have a clear map of the market. By map of the market, I mean a clear picture

of the actual situation. Nothing has to be neglected: the competitors, the actual prices, the

innovations, the past failures/successes, everything has to be considered if you want to be

able to set a correct price for your product or service.

When you enter a market with a wrong price strategy, it is really hard to move back. Price

strategy does not only mean the price. Nowadays, people look for affordable prices but also


for affordable methods of payment. If a product is really expensive, customer may do a leasing

or a loan rather than paying cash.

Every company should consider what kind of methods of payment are available in the market

and what they are able to offer without having lacks of available cash. If all the products are

paid by leasing, then no money is entering during the sales and no cash is available for the

daily business. An equilibrium needs to be achieved in order to attract sales and run a

successful and profitable business.

3.4 How to choose a good partner?

An entrepreneur has to keep in mind that good investors are also good partners for the future.

The analysis of those five key points is helpful to avoid disagreements or conflicts with future

partners.

Culture: to be aware of the values of people investing in your business is crucial for the

success of the partnership. It is important to share same objectives and opinions when you

need to collaborate, especially in this type of long term investment.

Support: how can they support your business? Do they have good networks or good coaching

plans? It is useful to look for information about their previous investments in order to know

what kind of support they are able to provide.

Reputation: How do people talk about them? What can you hear about their business and

their integrity? Do they represent the values you want to convey?

Experience: Do they have previous experiences in the field? If yes, what kind of experience

and what type of results did they get from it?

Financial capacity: how much are they able to invest? Do they have enough assets to help

your business to grow in the long run? Are they able to follow up with future investments?


Conclusion: lessons learned

The case studies have shown that the necessary analysis of the market for a potential new

product (or service) is not only a conceptual need but an asset that is required for an

entrepreneur to be able to convince VCs to invest in his idea.

As discussed in the guidelines, the golden idea is not the solution. The solution is to have an

initial idea and to analyze the market possibilities. If the market has significant opportunities,

the first thing to do is to develop a strategy while doing a thorough literature and market review

in order to make sure that your idea, or a similar one, is not being developed somewhere else.

The companies I have analyzed, both for investors and for entrepreneurs, have common goals.

The requirement for a successful development of an idea is to find the area of common interest.

The identification and the understanding of each other’s’ expectations is crucial for a win-win

collaboration in the long run. To do so, the investors require information and arguments to be

convinced on the real growth potential of the company, and the company needs to collect

evidence and support to promote the quality of its product and to demonstrate that there is a

potential market waiting for this product to be commercialized.

When entrepreneurs and investors manage to establish a clear communication covering the

mentioned aspects, the basis is set to establish a fruitful partnerships, resulting from the

qualities identified in the section providing the guidelines. Entrepreneurs may develop new

opportunities by collaborating with their investors, who can invest money as well as their time

and experience to coach and advice.

I had a lot of pleasure while doing my research. I believe this is an important, interesting and

useful topic, beyond its pure financial dimension. I hope non-financial readers appreciated this

thesis, as my aim was to make it clear and easy to read and understand for them.

I decided to use an innovative approach including different types of information and sources,

thanks to the mix of investors’ and investees’ recommendations and point of views collected

through interviews.

I would like this study to become a useful and frequent tool for entrepreneurs. A start-up has

great opportunities to be successful if the process and the guidelines discussed in this thesis

are used as a reference.

In the appendix 5, some important addresses are classified by categories. This list is made of

important contacts for entrepreneurs, likely to be useful at any stage of their business. It


includes funding contacts, innovation partners as well as venture events dedicated to young

entrepreneurs willing to succeed.


Bibliography

Interviews David Rimmer, co-founder of Index Ventures, 19th March 2013

Bernard Vogel, co-founder of Endeavour Vision, 19th March 2013

Tej Tadi, co-founder of Mindmaze, 10th May 2013

Andre Mercanzini, co-founder of Aleva Neurotherapeutics, 6th May 2013

Papers Thomas Hellmann and Manju Puri, Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence, Journal of Finance, 2002.

Kaplan, Steven N., and Per Stromberg, Leveraged Buyouts and Private Equity, Journal of Economic Perspectives, 2009.

Bob Zider, How Venture Capital works, Harvard Business Review, 1998.

Eli Talmor and Florin Vasvari, International Private Equity, John Wiley & sons, 2011

Online sources

http://thomsonreuters.com

http://www.entrepreneur.com

http://www.oecd-ilibrary.org

http://brandongaille.com/

http://invest.yourdictionary.com/

http://gigaom.com/

http://www.chefdentreprise.com/

http://fr.euronews.com/

http://www.startup.ch/

http://onstartups.com/

http://www.seca.ch/

http://papers.ssrn.com/

http://www.growthology.org/

http://www.ey.com

http://www.fundamentaltechnologiesii.com/


Appendix 1: Amounts raised by regions

In 2011, the majority of the investments came from the US, mainly from Sillicon Valley, New

England, South California and New York. Even though American VCs are leaders in their

industry, some regions such as Beijing (China) or United Kingdom are competing pretty well.

Source: Dow Jones Venture Source, 2012


Appendix 2: Historical trend

This figure shows the evolution of VC investments between 1995 and 2009. A distinction is

done between the stages, highlighting the two first ones (early and seed stage). The dot.com

bubble (2000) and the financial crisis (2008) had a clear negative effect on the amounts

invested. However, the VC industry shows a good ability to recover.

Source: OECD Science, Technology and Industry Scoreboard 2009


Appendix 3: Fundraising statistics

This table shows the number of VCFs raised by year and the respective amounts of the last

five years in the US. The amounts are starting to increase again after the crisis; the industry

seems to recover well.

Source: NVCA VC fundraising statistics for 2012


Appendix 4: Stock market entrance in 2012/2013

The five following tables show the venture-backed IPO’s in the U.S. in 2012 and early 2013.

There is a clear focus on Information technology and Life sciences, almost all the start-ups

who entered the stock market this last year are part of one of those two industries.

Source: Thomson Reuters & National Venture Capital Association


Source: Thomson Reuters & National Venture Capital Association


Appendix 5: Useful addresses

Public funding:

Swiss National Fund:

http://www.snf.ch

Swiss Innovation Agency

http://www.kti-cti.ch

European Union Research

http://ec.europa.eu/research

Foundation & grants:

Foundation Liechti “coup de pouce”

http://www.fondation-liechti.ch

Venturekick

http://www.venturekick.ch

Foundation de Vigier

www.devigier.ch

Foundation Gebert Rüf

www.grstiftung.ch

Foundation Volkswirtschaft

http://www.volkswirtschaft-stiftung.ch/

Startups.ch

www.startups.ch/de/award

Swiss Economic Award

www.swisseconomic.ch

Innovation:

Alliance for innovation

http://www.alliance-tt.ch

Innogration: EPFL’s support to start-up creation

http://vpiv.epfl.ch/innogrants

Genilem: support association for start-ups

http://www.genilem-suisse.ch/


Training:

Venturelab

http://www.venturelab.ch

Commission for Technology and Innovation (CTI): Entrepreneurship training

http://startuptraining.ch

Coaching:

A3 angels: Business angels and mentoring club

http://www.a3angels.ch/mentoring

Commission for Technology and Innovation (CTI): Start-up Label

http://www.ctistartup.ch

Idée Suisse Award

www.idee-suisse.ch

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